Junior ISAs (Individual Savings Accounts) were recently introduced in the UK. The concept is great. They provide a tax efficient means of building a lump sum of capital for your child for when he/she reaches adulthood.
The bad news is that even if you are a British citizen, if you are not UK resident, then you can't invest in one. This is a shame.
So, as a British (or any nationality for that matter, as other countries often have the same restrictions) expatriate, how does one go about saving for one's children?
Here are 3 simple ways of doing so.
1. Save in the bank. This is by far the easiest option. You have complete liquidity, you can access the money whenever you want and do whatever you want with it.
You also don't have to be worried about falling markets. You can be sure that whatever you invest that at least that amount will be available.
It's also super easy for Granny and Grandad to drop in a few extra pounds as and when they can which will help boost the final sum.
The down side is that bank interest rates are incredibly low right now and are likely to stay that way for some time. Couple that with rising inflation and you can guarantee that, in real terms, the value of your investment will fall.
2. Invest directly into funds. Find a fund(s) that you like and invest into them via a regular monthly standing order.
You can do this either directly through the fund manager, their website should provide you with instructions of how to do so, or through a fund supermarket/discount broker.
If you go directly through the fund manager then chances are that you will pay an initial charge of 5% on every investment that you make. If you go via the supermarket then this initial fee will often be rebated down to 0-0.75%.
The advantage of either approach is that it is relatively inexpensive as you don't have to pay for any advice. The disadvantage is that nobody is going to give you any advice.
This is fine if you have the time and willingness to do the research yourself. If you do not have the time to do so then it is a less attractive option.
There is also the high risk of chosing funds based purely on past performance. Fund supermarkets or your daily newspaper will publish tables of top performing funds over 1,2,3 years. It is easy to simply pick the top one and invest in that.
The downside is that the top funds in these tables are often top not due to the fact that they have a great fund manager but simply due to the fact that their sector has been "hot". A great example of this is back in 2000 these tables were stuffed with technology funds. How many of those funds are still there today?
3. Save Into a Regular payment Savings Plan
These types of structure are normally provided by life insurance companies in places like the Isle of Man or Channel Islands.
They allow you to save x amount a month for a specific term (e.g. 18 years) with your monthly payments being invested across a number of funds from a set menu.
These structures can be tax efficient as they allow you to switch between funds without incurring an immediate tax liability.
They sometimes attract a bad reputation as they are more expensive options than the first 2 that I mentioned. The reason for this, is that you are paying for advice. You are paying for a qualified adviser to advise you on which funds to buy, to monitor those funds on your behalf and to advise you as and when you should be switching from those funds to an alternative.
The bad press comes from the cases whereby having paid for such advice, investors subsequently fail to receive it (this brings us onto the need to select a good financial adviser in the first place, which, like the attributes that make a qualified adviser qualified, is the subject for a future post).
In conclusion, none of the above options are bad, they are just different. It is simply up to you to decide which best suits you and act accordingly.
Ross Naylor is an experienced UK qualified financial advisor who specializes in providing expatriates with impartial, transparent and common sense investment plans.
He writes frequently on a range of issues affecting would be investors. To sign up for his regular newsletter, follow this link - http://www.aesinternational.com/rossnaylor/e-zine-signup.
To simply find out more about how he works, visit his website - http://www.aesinternational.com/rossnaylor.
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